Monday, August 31, 2009

The Bond Market is Not Stupid

src="http://pagead2.googlesyndication.com/pagead/show_ads.js">and it's not pricing in inflation. I watch the 1-2 year yields and 90 day T-Bill. If the yields on these instruments continue to fall, the stock market will follow. Here's a 2 year daily log scale linear chart of the 2 year U.S. Bond yield:

A 2 year yield of less than 1% means the bond market is fully discounting deflation. Sure, the bond market could be wrong. But they've been right so far throughout this bear market. And the 1 year yield has already broken down (2 year daily log scale linear chart):

I think da big boyz are starting to scramble for the exits and are moving into liquid short-term U.S. government debt. This is not a good sign for the bulls. Maybe the bond market is wrong and is about to do a 180 degree turn the other way, but then again, maybe not.